On August 23, 2023, the SEC adopted new rules and rule amendments to enhance the regulation of private fund advisers. The SEC also updated Rule 206(4)-7 under the Investment Advisers Act, better known as the Compliance Rule, which applies to all Registered Investment Advisers (RIAs).

The changes to the Compliance Rule will require all RIAs, including those that do not advise private funds, to document in writing their annual review of their compliance policies and procedures. This requirement was implemented, because examiners have found that some RIAs do not make and preserve written documentation of the annual review of their compliance policies and procedures. The Adopting Release observed, however, that written documentation of the annual review has been widely adopted as a standard practice by RIAs and would not have a large impact on them.

The new rules and amendments are intended to protect private fund investors by increasing transparency, competition, and efficiency in the private funds market. In a press release, SEC Chair, Gary Gensler, explained, “By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency.” To enhance transparency, the final rules will require private fund advisers registered with the SEC to:

  • Provide investors with quarterly statements containing information about a private fund’s performance, fees, and expenses;
  • Obtain an annual financial statement audit of each private fund they advise; and
  • Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction.

The final rules will also prohibit all private fund advisers registered with the SEC from giving preferential treatment regarding redemptions and information if this treatment would have a material, negative effect on other investors. In all other cases of preferential treatment, the SEC adopted a disclosure-based exception. This exception includes a requirement to provide certain specified disclosures to current and prospective investors regarding the preferential treatment offered.

Generally, advisers will not be prohibited from engaging in certain restricted activities, as long as they provide appropriate specified disclosures. In certain instances, advisers must obtain investor consent.


What Will Be Required of All RIAs, Not Just Private Fund Advisers?

As noted above, the Compliance Rule was amended to require all RIAs to document their annual review in writing. Written documentation regarding the annual review helps the SEC to determine RIAs’ compliance with the applicable rules and strengthen their policies and procedures.

It should be noted that the Quarterly Statement Rule, Private Fund Audit Rule, Adviser-Led Secondaries Rule, Restricted Activities Rule, and Preferential Treatment Rule do not apply to investment advisers with respect to securitized asset funds they advise.


What Will Be Required of Registered Private Fund Advisers?

Registered private fund advisers will be subject to additional compliance requirements under the new rules.

  • Quarterly Statement Rule. Registered private fund advisers will be required to distribute a quarterly statement to private fund investors. This statement must disclose fund-level information pertaining to performance, the cost of investing in the private fund, fees and expenses paid by the private fund, as well as certain compensation and other amounts paid to the RIA.
  • Private Fund Audit Rule. Registered private fund advisers must ensure that the private funds they advise undergo a financial statement audit that satisfies the requirements of the audit provision in the Custody Rule, which is found in Rule 206(4)-1 under the Investments Advisers Act. These audits will provide an important safeguard on an adviser’s valuation of private fund assets and will protect private fund investors against the misappropriation of fund assets.
  • Adviser-Led Secondaries Rule. A registered private fund adviser will be required to obtain a fairness opinion or a valuation opinion when offering existing fund investors the choice between selling their interests in a private fund and converting or exchanging their interests in it for interests in another vehicle advised by the adviser or any of its related persons. This rule will also require the adviser to prepare and distribute to the private fund’s investors a summary of any material business relationships the adviser has, or has had within the prior two years, with the independent opinion provider. This requirement will help to guard against an adviser’s conflicts of interest in structuring and leading another vehicle.
  • Books and records rule amendments. As is the case with most rule changes, the SEC also amends books and records requirements so examiners can evaluate an RIA’s compliance efforts.


What Will Be Required of All Private Fund Advisers?

Restricted Activities Rule. All private fund advisers are prohibited from engaging in the following activities:

  • Charging or allocating to the private fund fees or expenses arising from an investigation of the adviser without disclosure and consent from fund investors. In addition, an adviser may not charge fees or expenses related to an investigation that results or has resulted in a court or governmental authority imposing a sanction for a violation of the Investment Advisers Act or its rules;
  • Charging or allocating to the private fund regulatory, examination, or compliance fees or expenses of the adviser, unless those fees and expenses are disclosed to investors;
  • Reducing the amount of an adviser clawback by certain taxes, unless the adviser discloses the pre-tax and post-tax amount of the clawback to investors;
  • Charging or allocating fees or expenses related to a portfolio investment on a non-pro rata basis, unless the allocation approach is fair and equitable and the adviser distributes advance written notice of the non-pro rata charge and describes how the allocation approach is fair and equitable under the circumstances; and
  • Borrowing or receiving an extension of credit from a private fund client without disclosure to, and consent from, fund investors.

Preferential Treatment Rule. Private fund advisers may not provide preferential terms to investors regarding:

  • Certain redemptions from the fund unless the ability to redeem is required by applicable law or the adviser offers the preferential redemption rights to all other investors without qualification; and
  • Certain preferential information about portfolio holdings or exposures unless it is offered to all investors.

In addition, private fund advisers may not provide preferential treatment to investors unless certain terms are disclosed in advance of an investor’s investment in the private fund and all terms are disclosed after the investor’s investment.


Legacy Status. To avoid requiring advisers and investors to renegotiate governing agreements for existing funds, the SEC adopted legacy status provisions that apply to certain restricted activities and preferential treatment provisions. Legacy status applies to those written governing agreements entered into prior to the compliance date and with respect to funds that have commenced operations by that point in time.



All RIAs should take note that they must comply with the Compliance Rule under the Investment Advisers Act within sixty days after its publication in the Federal Register.

The compliance date for the Private Fund Audit Rule and the Quarterly Statement Rule will be eighteen months after their publication in the Federal Register.

For the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule, the compliance dates are:

  • Twelve months after they are published in the Federal Register for advisers with $1.5 billion or more in private funds assets under management; and
  • Eighteen months after they are published in the Federal Register for advisers with less than $1.5 billion in private funds under management.

The press release, fact sheet, and Adopting Release, can be found here.


About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.

RIA Compliance Group, LLC – 701 SE 6th Ave, Suite 201, Delray Beach, FL 33483 – Tel: 561-600-0564 – sales@ria-compliance.com